Good morning. My name is Johnna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Second Quarter 2014 Earnings Call. [Operator Instructions] Brad Ankerholz, Vice President and Treasurer, you may begin your conference.

Thanks, Johnna, and welcome, everybody, to the Graphic Packaging Holding Company's Q2 2014 Earnings Call. Commenting on results this morning are David Scheible, the company's Chairman, President and CEO; Mike Doss, our Chief Operating Officer; and Dan Blount, our Chief Financial Officer. To help you along with today's call, we've provided a slide presentation, which can be accessed by clicking the Webcasts and Presentations link on the Investors section of our website, which is graphicpkg.com I would like to remind everyone that statements of our expectations, plans, estimates and beliefs regarding future performance and events constitute future-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations. Information regarding these risks and uncertainties is contained in the company's periodic filings with the Securities and Exchange Commission. Undue reliance should not be placed on forward-looking statements, as such statements speak only as of the date on which they are made, and the company undertakes no obligation to update such statements. David, I'll turn it over to you now.

Thanks, Brad. Good morning, everyone. We had a busy and important quarter for Graphic Packaging. We reported second quarter adjusted earnings per share of $0.20 compared to $0.13 a year ago, same quarter. Second quarter adjusted EBITDA improved to $191 million from $175 million last year. The underlying trends in the business improved over quarter 1, as did our performance. We explained on the first quarter call that we did expect the business to normalize in the second quarter, after the weather-related disruptions we experienced in February and March. Specifically, we expected to make up around half of the weather-related EBITDA impact over the rest of the year, and I'm happy to report we are on target to do so. We made great progress operationally and strategically, as the business performed in line with our expectations globally, and we remain on track to generate $350 million of net debt reduction from operating activities in 2014. As I said in this morning's press release, our first priority is running the business, but we also took several major strategic steps during the quarter to position Graphic Packaging as a global leader in the packaging space long term. Let me highlight a few noteworthy accomplishments. First, we finalized the UK-based Benson Group acquisition, greatly enhancing our folding carton business in Europe, enabling Graphic to enter the sizable European store brand market. The acquisition broadens our customer base, and it enables us to offer our current customers a wider range of new products and services. Our European business performed well in terms of sales and EBITDA, and we are on track with our synergies as we head into second half. I'm very pleased with our progress in Europe at this time. Second, we concluded the sale of our multi-wall bag business to Mondi, which…

Thank you, David, and good morning, everyone. It's a pleasure to be joining the earnings calls, and I look forward to interacting with the investment community on a more regular basis. Graphic Packaging is committed to being the leader in the global Paperboard Packaging business in the food and beverage sectors. We spent the last 5 years both building and optimizing our core business around this focus. We've divested noncore assets and businesses to free up capital, reinvested in our core business and substantially reduced debt. We streamlined and significantly increased productivity in our low-cost mills. We've optimized our network of converting facilities around both our mills and our marquee customers. We've implemented LEAN and Six Sigma resources to shorten our supply chain and improved efficiencies across the organization. In short, we've built a very unique business model that vertically integrates some of the lowest-cost mills with a network of highly efficient converting facilities. And as we first mentioned during our June 3 Investor Day in New York, our mill system contains 150,000 to 200,000 tons of low cost, unutilized pulp capacity that further provides us with tremendous operating leverage as we continue to grow. With the model built, we're focused on growing our converting volumes. We do this in a number of ways: new product development, channel expansion, product substitution, geographic expansion and targeted acquisitions. Over the past few years, we significantly expanded our penetration in the growing craft beer and pasta markets, focused our new product development efforts on corrugated substitution, utilizing our SUS paperboard and made 3 major strategic acquisitions in Europe to further expand our geographic presence in food and beverage markets. Graphic's new product development strategy remains consistent: focus on convenient solutions for busy consumers, create shelf impact for customer products at the retail level…

Thanks, Mike, and good morning, everyone. To aid in our discussion this morning, I'll follow our posted presentation. Let's start on Slide 12. We reported adjusted second quarter EBITDA of nearly $191 million. Adjusted earnings per share was $0.20, up $0.07 over last year, and adjusted net income improved by 50%. As you can see, Q2 adjusted net income rose to $66 million from $44 million last year. Improved operating results and lower interest expense drove the earnings increase. In the quarter, EBITDA margins climbed to 17%, and interest expense, driven by lower debt levels and lower borrowing rates, declined by $8 million. Primarily due to the divestiture of multi-wall bag, the Q2 P&L includes numerous nonrecurring charges related to the sale. To aid in analysis of the quarter, we adjusted for these charges in order to provide comparable year-over-year reporting of earnings that resulted from operations. In aggregate, the charge for the multi-wall bag sale and other M&A activity totals $106 million, net of tax. The charge consists of 3 major components. First, the successful sale of the multi-wall bag business resulted in a $165 million pretax loss. The majority of this loss results from the write-off of intangible assets and goodwill that was established in 2008 when the business was acquired as part of the larger activity acquisition; second, $6 million primarily related to fees incurred in the acquisition of Benson; and finally, a $65 million tax benefit offsets the loss. This loss increases the size of the NOL, which is expected to be monetized within the next 3 years. We will review the status of the NOL a little later. As you heard from Mike, post the multi-wall bag sale, Graphic Packaging becomes a pure play Paperboard Packaging business with a much more efficient operating model. We…

Johnna, if you could go ahead and redefine the Q&A process please.

[Operator Instructions] Your first question comes from Ghansham Panjabi. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: First off, on productivity, for 2014, you initially targeted $70 million to $90 million for the year. You're lowering it to $60 million post the weather issues for the first quarter and also the divestitures. David, I know it's early, but is there a reason productivity should not be in the $70 million to $90 million range for '15, as you look out ahead now?

For 2015? I'm going to try and get us through this next quarter before I worry too much about productivity for 2015. Because our timing for working that out is our September is when we really do our LRP and then we put our operating plan together closer to November. So we'll just now begin to roll up all the individual business P&Ls to be able to look at operating performance. I'm not being evasive, but our performance is tied to individual projects in each mill and each converting plant, and so it takes us a little while to put that together. So until I've seen it, I don't want to comment on it. I don't think there's any reason for us to expect that our performance improvement will be materially different, but there were a lot of moving parts with the divestitures and the acquisitions that we need to look at, in the acquisitions, in case of Benson and others, to find out what their performance options are. But directionally, I don't expect it, but to try to nail down a number for '15 at this point in time is just too early in our process to do so. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay. That makes sense. And then just can you touch on CRB supply and demand dynamics across the industry? It looks like one of your competitors is shutting some capacity, which seems to be a decent chunk of the industry. Just philosophically, how should we think about the impact on the industry and also your business?

Yes, I mean, I saw the same announcements you did. I don't have any better data than you have. I think that mill was probably somewhere in the 140,000 to 150,000 tons of CRB. CRB is still about a 2-million-ton market, so you can do the math for what the industry looks like. I think our best view on that is there'll be some short-term dislocation, as customers that were previously supplied there refind a different supply base. So those in the industry will benefit from some of that. But CRB was strengthening a little bit anyway. So I mean, the backlogs were not -- they -- were not tight, but it was not a materially weak market. So I think it should, in the long term, be business as usual. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay, and then maybe a final one for Dan. The $6.6 million charge that you had at the reconciliation in your EBITDA table in the press release, how does that split between Paperboard and Flexibles?

The $6.6 million relates to the Benson transaction, principally, so it's in the Paperboard Packaging segment.

Your next question comes from Anthony Pettinari.

You had good margin growth in the quarter, and I'm wondering if it's possible to parse out what margins were in Europe and what you think they could be in 2015.

Yes, I mean, it's a 2-part question, do we know what the margins were in Europe? Yes. Do we disclose what the margins are in the individual business segments? No. What I would tell you on a go-forward basis is that we believe our margins will continue to expand across the enterprise. But remember that we ship board from United States to Europe because it's an integrated play. So some of those margins manifest itself back to the United States because we make Europe buy on a market-based board price. So those margins end up back in the U.S. So for us, on an integrated play, we look at that margins globally. Those margins are continuing to trend upward in our view.

Okay, that's helpful. And then in terms of European volume growth, is it possible to get some color on what your volume growth was year-over-year, maybe what you think the industry was? If you can just help us kind of understand maybe the share gain that you're seeing or if you can give us any kind of quantification around that.

Yes, this is Mike Doss. I would characterize that as year-over-year really isn't relevant because of all the acquisition work that we've done, but what we see right now is a pretty steady backlog in Europe. We're relatively busy.

And a lot of it -- the beverage business in Europe is growing. I mentioned the premiumization, but we're building machines, and a number of them are ending up in Europe. You'll see some of the areas, like Germany, for example. You're starting to find them moving from less premium packages to 6-pack bottle carriers, which is a lot what you find in the craft market, but which requires paperboard and requires machines. So in some of the sectors, we've seen better than growth. But it's not so much share gain versus somebody else making paper, it's share gains versus alternative packaging, which is good. So as Mike said, our European backlogs are good. We're shipping a lot of board into Europe. We've seen good growth in the overall board dynamics from Europe. So the economic backdrop there is difficult, and you know that probably better than I do, but we're still encouraged by the way the business is performing at both top line and bottom line in Europe at this point in time.

Okay, okay. And maybe just one last one on U.S. volumes. I mean clearly, cereal, pasta, a lot of these categories have been much weaker than many of us have expected for some time. As you look at the second half of the year, do you see any reason for sort of positive volume growth in those categories? Or should we expect continued, I don't know, decline, low single digits year-over-year? How do you think about volume growth in those categories that have been sort of challenged in the U.S.?

Well, third quarter starts back to school, so you'll see the seasonality, of course, pick back up in those sectors, but structurally, I don't think we expect any big rebound. You have seen, however, a number of our large consumer goods companies are promoting, and cereal is one of the categories a number of their CEOs have talked about promoting. So the backlogs in that business are okay. But we aren't seeing -- we aren't expecting or forecasting some bounce materially different in those spaces. It just -- look, the -- I think the U.S. consumer is still challenged, right? And the people that are buying in the center of the store are materially challenged, right? Their wages are lower, they're paying more for X, Y and Z. Right now, they're getting a benefit on energy, but that's short-lived and that money doesn't necessarily translate to spending more long term. So I think we're looking at flat to slightly down in those markets, with the exception of beer; and pasta, actually is -- it looks pretty good. But it's going to be individual SKUs that are -- individual end-use sectors that will be better overall. I think you've got it right, it's kind of flat to slightly down.

Your next question comes from the line of George Staphos.

It's actually John [ph] sitting in for George. I just have a couple of questions for you. The first question is I was wondering if you could provide a little bit of granularity on the source of the $22 million of productivity.

Well, I think what I'll tell you is that most of our productivity comes from the mills, and we had a terrible quarter, Q1, in the mills. This $22 million or so is really sort of a normalized rate for us. Generally speaking, 75% of our improvement comes in the mills, and that's probably about what we saw here. We used less energy, we used less fiber, and we had a much more efficient operations because mills weren't up and down during the quarter. So you saw a more normalized rate. I will tell you, however, I was very pleased with the operational results in our converting business, particularly in May and June timeframe. We struggled a little bit early part of the quarter because we were still coming out of the weather-related, so we were sort of catching up. But by the time, May and June got -- they did very well. We saw some great productivity improvement, that I expect to continue, in our converting businesses on a go-forward basis. So it was a very -- much more of a normalized performance improvement quarter versus Q1.

Okay, great. And then also last quarter, you said that there was a reasonable likelihood of other price increases in 2015 given the contractual terms. And from that standpoint, I was just wondering if you can provide a little bit of color on how we might be able to estimate that on, I guess, a kind of stand-alone basis?

Yes, I mean, I think what I said was that traditionally, we -- previous year inflation sort of gives you a good harbinger for what you're going to see in pricing in the forward years, and so that's kind of what we did. We're going to have some hangover pricing that's going to continue into 2015 because we had some pretty significant inflation last year, and that's going to continue into 2015. And then, as you look at our input inflation this year, I think we're looking at maybe $35 million or so. And that will be -- $35 million to $40 million of input inflation for the year, that will be sort of where we would expect pricing to move into 2015. Because traditionally, our contracts, pricing in the industry tends to really be around input cost inflation or deflation, as we found in 2011.

Okay, great. And then, now with regards to board prices, obviously, we've seen that move a little bit higher, and I was just wondering, have you started to see any sort of substitution away from paperboard into plastics and film?

Well, plastics and film have gone up as well, right? So you've seen price pressure on all that. We have not seen any change. You've seen more substitution to and from the grades. Between SBS and CRB and CUK, you see that kind of normal back and forth. But we really haven't seen any change from plastics, other than what I mentioned in beer, where the customers, it's not so much on a cost basis, they're trying to get more premium pricing for their beer product and, therefore, they put it in premium packaging, which tends to be paperboard versus plastics. So we clearly have seen a move in beer away from plastic or alternative packaging into paperboard around the globe.

Okay, great. And then just one last question before I let you move on. Generally, with regards to all the logistical issues that we've seen from both rail and freight, has that encouraged you guys to keep extra inventory on hand? Or a little perhaps delayed purchases, I mean, shipments and purchases of product?

Now you sound like one of my operating guys explaining why he's got excess inventory in his system, so we'll go with that. But the fact of the matter is, freighting for us was up about $1 million this quarter, so we saw some freight inflation. And it is true that getting trucks -- and right now, rail -- actually getting access to rail is more difficult than truck. With all the shale oil stuff that's going on, a lot of the capacity in rail is not coming to paperboard. As you may expect, we're at the lower end of the desirability of the rail lines, so we have to fight for every car that we get. So we've seen some issues there. We have some inventory in the system to do that, but not appreciably more than we would normally, normally have. And in fact, for us, a lot more of our paperboard now is going overseas to support our European growth activity, so a lot of the inventory is actually on the water getting from Savannah to the ports in Europe. That's part of the inventory build at Graphic Packaging, and that will continue because it takes, what? Five weeks, 4 to 5 weeks to get over there now?

Four.

Four weeks to get over there, and that inventory is going to reside in our bases.

Your next question comes from the line of Philip Ng.

Quick question. I mean, I guess longer term, that news with your competitor shutting down their capacity in the CRB is certainly constructive, but in the short term, I think you alluded to that as well, backlogs have come in a bit for CRB and CUK. PPI publication was reporting that. You could see some downside pressure. It didn't sound like you were too worried about it, but I just wanted some color on your thoughts in the back half in terms of pricing.

Well, I mean, we have -- our backlogs in our paperboard mills are good. So yes, and I think, that's what RISI reported, that they were pretty stabilized year-on-year and pricing was reflecting that. We hadn't really seen a lot of downside pressure on pricing in our paperboard business. So that's -- I feel okay about that. I mean, I think a lot of it really depends upon what we think demand is going to be in the second half of the year, right? I mean, if we could hit -- we're going to have -- if we hit back-to-school in the third quarter, that generally pulls demand and capacity really does -- it's not like there's new capacity that comes online, so that tends to tighten them up in the third quarter, and that's what we would expect. And then fourth quarter is generally a much softer quarter for us in terms of sales and earnings, but that's all sort of factored into our expectations and guidance, and you guys have modeled that out for a long time.

Got you. And then I guess one of the companies we cover mentioned some of their customers saw some de-stocking on the food side. Did you see any of that impact during the third quarter?

That's another one of those, "How would I know?" I mean, de-stocking through a system the size of the food and beverage business in the United States of America, pretty difficult. Remember, Wal-Mart doesn't even report into those statistics, so you have a little visibility over their supply chain, but not great. Honestly, I don't know that I would buy into the de-stocking thing. What I would tell you is that it's just been a difficult economic recovery for the average blue-collar American, and those are our customers. More than anything, those are the trends that we're fighting versus some ongoing de-stocking of the pantry. I'm not buying that.

Got you. And then I guess medium to long term, I believe your board's meeting in September, would cash flow deployment priorities be an area of focus in the meeting? And should we get an update later this year?

When we talk -- when we put our LRP together, we'll look at everything: sales, EBITDA, cash flow and what we're going to do relative to our capital investment, synergy improvement and what we'll do with cash flow that's not needed for debt reduction. As Dan said, we should be pretty close. We'll be in that 2.5x to 3x range by the end of the year, which provides us more flexibility in 2015 on a go-forward basis, and we'll sit down with the Board and figure out what that looks like. But for me, and I've talked about this before, I like to generate the cash first before I go spend it. Unlike my daughters who believe it's the other way around, I know it's better to have it and then figure out what you're going to do with it, and that's what we're going to be working on.

[Operator Instructions] Your next question comes from Usha Guntupalli.

You mentioned a potential upside to synergies from the recent European acquisitions. Could you put a range on what that upside could be? And also, some color on the dry wood [ph] for that upside?

So really, the upside for us wasn't an improvement in the actual number, it was more the networking and the ability to kind of work on a more global basis to service our multinational customers. That's really the synergy benefit we're seeing, both in terms of our operator exchanges and in terms of our product development folks. And so really, the way that helps us, as we think about the medium term, is over here, we have to generate the cost reduction that we talked about here and the ranges that we did, and those are the types of projects that we are able to share from one business unit to another to really help us make sure that we get that each and every year. That's really more the context of the upside we were talking about.

That's helpful. And then for the Flexible Packaging business in the second half, what kind of a ramp in margins can we expect post the sale of multi-wall bag business?

Yes, so that will be a question for Mondi. We no longer have any business in flexible or multi-wall bag. Graphic Packaging is a pure play paperboard business, so we have no projections in the second half for anything that is not paperboard-based.

I just meant like margins for your business, given that, that business is no longer there, so just trying back-allocate -- like how much benefit could that mean for your margins?

Yes, I mean you saw our margins increase in the quarter. Obviously, we were 17%, which included multi-wall bag. We talked about -- Dan's talked about trending north of that, closer to 18%, and that's probably where we're headed, assuming everything else. But on a normalized basis, paperboard margins were higher, and you would expect us to be heading towards that 18% EBITDA margin basis -- EBITDA margin.

Just to remind you, we did give you -- we did recast the financials to give you an LTM based on the new business profile, and you can use that as your starting baseline to build forward and to go through the second half of the year. And David also gave you guidance on cost reduction and pricing on top of that so that you can use that information to get to where you need to be.

I think the key on margins for us will -- we're pretty sure we get the cost reduction, the pricing is sort of locked in. It really depends upon how does the volume hold in the second half of the year, right? That's where the margin expansion is. So assuming that the volume sort of holds where we expect right now -- we'd expect margin expansion. Right now, I think it's very difficult for us to give a really good view of the U.S. economic performance, because it seems to be -- it's a variable recovery, to say the absolute least.

That's helpful. And just one last one on inflation. Commodity inflation seem to have picked up in the second quarter. Could you provide more color on the key drivers and your expectation for each one in the second half? Just trying to figure out what you have factored in for each of the key buckets?

Yes, let me help a little bit with that. Let's just use the $13 million worth of commodity inflation in the second quarter. About $4 million of that or so was energy inflation. The $2.7 million was -- about $3 million of it was external board. We buy SBS -- well, we buy some other boards, but we buy predominantly SBS. And as you well know, there was a price increase registered in SBS. And so year-on-year, that was about $3 million. And then we had about $2 million worth of wood -- and I mean round wood inflation. As I look forward in the second half of the year, I think energy inflation is pretty stabilized. We're hedging, at this point in time, actually, below $4 as we go forward. So I think energy, year-on-year, will be pretty flat. The board -- external board will continue to be around the same kind of a number because it's a year-on-year comp. I can't remember exactly when those prices went up...

It times out, really, at the end of Q1 of next year.

So it will be a direct -- and then, wood prices this time of year tend to trend down a little bit because we don't fight the weather so much. We can get in and get the pine out pretty easily, so I think the $2 million worth of wood inflation is probably at the upper end of what we would expect to see in the second quarter. And I mentioned earlier, freight was about $1 million year-on-year. That feels about right. You've seen the surcharges come down a little bit because the energy complex is variable unless somebody launches another rocket or something that creates a dislocation we haven't planned on, you would expect freight to be around that. So I mean, those are sort of the -- that's why I think it will moderate a little bit in the third quarter because I don't think energy is going to be up nearly that much for us.

Your last question comes from the line of Ketan Mamtora.

Just a quick one. Can you remind us what is sort of the base capital spending for this business now and some of the key projects you have for 2014?

Well, our cap -- I think if you look on Page 17, we are going to spend somewhere between $185 million and $200 million, roughly, on an annualized basis. 75% or 80% of that or more is in the mills, and those projects are really around cost reduction, fiber -- eliminating fiber, eliminating water -- use of water and chemical reductions. For example, this year, I think we mentioned that we spent $14 million in Kalamazoo putting a curtain coater on that thing. So that takes out $10 million a year of use of TiO2, titanium dioxide, in our coatings because we're putting a different kind of thing. Those are the kinds of projects that will be in our mill. And as I said earlier in the call, each one of the capital projects, like our performance, are tied to individual projects. So when we talk about the range, it's because in a given year, it may range up if we have a great project. If we don't, then we won't spend the capital. Fortunately, for Graphic, because we were so highly levered for a number of years, our best capital project's really just paying down debt, and that's what Dan forced us to do. As we go forward, a lot of the projects in the mills are still great projects. They were great before, but now they rise to the level of we should fund these projects because paying down debt does not have nearly as much return to the shareholders. And so that's why a lot of the capital is really on cost reduction, which is why when I talk about I think we're going to be good in our cost reduction program, it's because I'm focusing more and more of my CapEx towards those kinds of things on a go-forward basis.

That's very helpful. And then one last one, with your recent expansion in Europe, obviously, the 2 acquisitions that you did earlier and then Benson, would you, at some point, look at sort of recycled mill capacity in Europe?

That's -- I would never say never to anything, because you just don't know how the structure and the industry will change. Right now, I think in Europe, we've got our hands full just integrating these 3 businesses, plus fixing our old one. We had some plant shutdowns, some things that we're doing relative to integrating new tons. So that's going to be our focus in 2014 and '15. Long term, we'll take a look at any of those things that we might think will improve the business in Europe.

There are no further questions at this time. I'll turn the call back over to the presenters.

Yes. Well, thank you very much, all, and we'll talk to you in the next quarter.

This concludes today's conference call. You may now disconnect.